The factory was frozen by Indian authorities over a tax dispute

Nokia has asked a court in Delhi to revoke a freeze on its factory in India over a tax dispute, ahead of the proposed acquisition by Microsoft of its handset business.

The Delhi High Court had earlier ordered the country's Income Tax Department to release bank accounts held by Nokia, but continued a freeze on the factory in Chennai in south India in connection with a US$331 million demand from tax authorities over taxes for mobile phone software licenses.(

Nokia has now asked the court to lift the freeze by Dec. 12 at the latest in view of the Microsoft acquisition, which it still expects will close in the first quarter of 2014. "Should the freeze be lifted, Nokia expects a successful transfer of its Indian factory assets to Microsoft," the company said in a statement.

"If, however, the freeze continues, Nokia must prepare for the eventuality that the Indian factory assets do not transfer to Microsoft," it added.

Microsoft said in September it plans to acquire Nokia's Devices & Services business, which includes the smartphone and mobile phones businesses, for over $7 billion. The deal was approved by Nokia's shareholders earlier this week.

The next hearing in the Delhi court is scheduled for Nov. 28.

If the court does not rule in its favor, Nokia may have to temporarily convert the Indian entity, which runs the factory and research and development in the country, into a contract manufacturer for Microsoft, while merging only its sales entity with the software giant, according to sources close to the situation.

The freezing of the immovable assets prevents them from being sold, but production continues at the factory.

Microsoft's acquisition of Nokia's phone business has been cleared in India by the Competition Commission of India. The country's antitrust agency ruled that the combination of the two companies will not likely have an "appreciable adverse effect" on local competition.

Nokia said it is committed to finding a solution with the tax authorities "in accordance with all applicable laws." A number of tech companies including Vodafone have ongoing tax disputes in India, primarily over the interpretation of the country's complex laws.

John Ribeiro covers outsourcing and general technology breaking news from India for The IDG News Service. Follow John on Twitter at @Johnribeiro. John's e-mail address is john_ribeiro@idg.com